In response to last week’s newsletter, I received an email which asked the question and made the statement: “does our trade deficit really matter? After all, cheaper goods benefit the US consumer, which is the largest part of the economic equation.” The answer is: it probably doesn’t.
Some years ago, I heard a somewhat well-known economist say it isn’t important if the United States makes or exports anything, as long as foreigners continue to invest in our economy and financial system. Theoretically, she was absolutely right. Then, she stated the true value of any good or service isn’t in its production. It is in the design, engineering, and technology which enable you to fulfill some want, desire, or need. So, why not focus your economy on what pays the most, and outsource the rest? Hmm.
Consider a book. Why did you buy it? Was it for the individual component parts? The paper and ink? The manual labor involved with the printing and binding? Or was it for the ideas, imagination, and/or artistry of the person(s) who wrote it? Illustrated it? Let me ask one more: are you paying for the paint or are you paying for the Monet?
The answer is obvious. After all, just about anyone can throw some pigment on a canvas. However, few of us have the talent of a Claude Monet, ever had or ever will. That is why my attempts at art end up in the garbage, and his reside in museums and the private collections of the wealthiest among us.
In truth, if only all of us could be engineers and visionaries, we would all be fabulously rich! Right? I mean that is where the money is, the value-add proposition. Indeed. Well…
There are some real problems with sweeping statements like “it doesn’t matter if the United States makes or exports anything.” First, not all of us are designers, architects, artists, etc., let alone capable of being so. In fact, few of us are. Second, if we were ALL involved in the design and engineering of products, the economy would place a higher importance on production because there would be no one to do it. It is a simple function of supply and demand.
Even so, the numbers are what the numbers are, and what that economist said all those years ago is theoretically accurate. We can run as big a trade deficit as humanly possible. As long as we clever enough, the remainder of the world will invest in our economy. This inflow of dollars from foreign investment will offset the outflow of US currency from the trade deficit. In terms of the balance of payments, it is essentially a wash, in theory.
This is where I take issue with ‘economics in theory’: people live, work, and die in reality. As a result, for some years, I have told groups to whom I have spoken the biggest problems facing the United States aren’t economic. They are societal. After all, the most marketable 25% among us can increase their output 10% and everyone else can be flat, I mean 0%, and the economy would grow 2.5%. As cold as it may seem, calculating Gross Domestic Product is nothing more than math.
So, what happens to ‘rest of the lot’ who isn’t as clever or as well-trained? The proverbial unwashed? The 75%? Is this okay, this no growth? After all, what is capitalism if it isn’t the survival of the economically fittest? Right? The bottom 75% should just try a little harder, you know. They should get the necessary training so they can eventually get into the Top 25%. That sort of thing, right? In economic theory, you know the answer: of course, in theory. If only is was that simple in reality.
First, very few of us, are smart or clever enough to make a meaningful living from what we can design, engineer, or create with our minds. Put another way, there are many Americans who compete in the 21st Century knowledge-based economy with their manual labor. As globalization has improved access to both technology and capital, un and semi-skilled labor in the US has had a hard time competing with their counterparts in advanced emerging markets like China and even Mexico. Basically, despite our edge in technology, increased numbers of blue-collar American workers are no longer more productive than the competition is cheap in some industries. I hope this makes.
As a result, many production jobs have been outsourced to other countries or replaced with increased use of technology. After all, a ‘robot’ will do what you program it to do. It doesn’t ask for time off, doesn’t go on strike, doesn’t show up late, and doesn’t require any benefits. Combined, this has been a shock to the blue-collar middle class in the United States this century.
At the end of 1999, according to the Bureau of Labor Statistics (BLS), the US economy had 12,490K production workers. This represented 8.92% of the official Civilian Labor Force of 139,941K. As of July 31, 2019, the BLS estimates there are 8,993K US workers on production payrolls. Obviously, that is an absolute decline of 3,497K jobs. Further, the labor force has increased to an estimated 162,510K participants, meaning production jobs as percent of the total labor force has fallen to 5.53%.
Those are big drops in both absolute and relative terms.
The kneejerk response to such data is: “capital moves to its highest and best use, including labor. As a result, many workers have shifted from the production jobs of yesterday to the higher paying service jobs of today.” This is partially true. There are undoubtedly many former blue-collar workers who have retrained to adapt to the changing economy. However, according to the statistics, not everyone has, not even close.
There is perhaps some truth to the myth of last century’s economy, at least a bulk of last century. The urban blue-collar worker went to school until they were old enough to get a job at the local mill or factory. As I have told groups in the past, and this is completely unscientific: the education system was designed to generate workers who were smart enough to operate the necessary machinery, think somewhat constructively, and do the daily crossword in the newspaper. The majority of Americans didn’t have to pursue a college education. It went straight into the workforce or military service after high school. Much has changed since then, as has the demand for un and semi-skilled labor.
In the table below, I have outlined the median income for households with a certain type of educational attainment. The numbers in the table are Census Bureau estimates using constant (inflation adjusted) 2017 dollars. Here is the data:
|Attainment||Number of Households||Median Income|
|Less than 9th grade (2017)||4,094 K||$26,587|
|Less than 9th grade (1999)||6,967 K||$25,415|
|Up to 12th grade no diploma (2017)||7,467 K||$30,100|
|Up to 12th grade no diploma (2017)||9,193 K||$32,059|
|HS diploma or GED (2017)||32,111 K||$44,970|
|HS Diploma of GED (1999)||31,419 K||$52,575|
|Some college, No Degree (2017)||21,162 K||$55,563|
|Some college, No Degree (1999)||18,230 K||$64,965|
|Total, No Degree (2017)||64,834 K||$45,554|
|Total, No degree (1999)||65,809 K||$50,266|
|TOTAL, All Education (2017)||121,375 K||$62,625|
|TOTAL, All Education (1999)||100,590 K||$61,820|
|Bachelor’s Degree or more (2017)||43,673 K||$100,021|
|Bachelor’s Degree or more (1999)||26,927 K||$102,897|
If the Census Bureau did its job correctly, it appears as though less highly educated, and by implication less highly skilled, working households have done worse this century than more highly educated ones. The former has seen its purchasing power fall roughly 9.4%, compared to the latter’s 2.8%.
Interestingly, both groups (as defined by educational attainment) have done worse since 1999. However, there are now MORE highly educated households in both absolute and relative terms, which brings UP the overall median. As a result, there are more families bringing in a higher level of income even if that higher income is slightly lower than it was. I hope that makes sense.
Perhaps more telling, if not damning, is how our high school graduates who haven’t completed a higher degree or diploma have fared. Understand, at one point in our nation’s history, if not throughout most of it, a high school education was adequate enough to enter the adult workforce. In 1999, there were an estimated 49,649K of these households in our country, just short of 50%. The weighted median income for this group was $57,124 in constant 2017 dollars.
Fast forward to 2017, and the number of these households increased to 53,273K, even as its percent of all households fell to 44%. Somewhat shockingly, the median household income for this subset of America fell to $49,178, which represented a 13.9% decrease in purchasing power since 1999, less than 20 years. More than just about anything I have seen or read, this little table illustrates the relative gutting of the blue-collar middle class in the United States. These workers don’t just have to compete with folks from the next county or even state over. They often have to compete with workers, quite literally, from around the world.
Yes, people can get additional training and education to improve their situation, and many have. Yes, people can and do move up and down the income brackets throughout their economic lives, as have I. All of it. However, it is difficult to look at a table like the one I created, and suggest an explosion in our trade deficit, cheap foreign made goods, and a decrease in our blue-collar middle-class workforce have been a huge blessing for the median American family. The numbers simply don’t bear it out.
As for numbers, the US trade deficit in goods is staggering. In 2018, we ran an $875 billion goods deficit with the rest of the world. According to IMF 2018 estimates, this little deficit of ours would be only slightly less than the entire GDP of the Netherlands, the combined annual economic output of every man, woman, and child in that country of roughly 17 million.
…but of course, we were able to attract at least that much in terms of foreign investments and deposits at banks in our country. So, all is good, right? We don’t really need to make or export anything in order for our economy to grow. Again, right?
Theoretically, yeah, you are right. We have grown our economy in aggregate, even if the median household in the country has basically limped along over the last 20 years. We truly don’t have to make or export anything for the dollars to balance and the tables to grow. It will just be uneven growth, and we will have to decide, as a society, whether that is okay or not.
I suspect it isn’t with most people, but what is the answer? Is it mandating a $15/hour minimum wage even if the worker’s output isn’t worth it? Running ever more people through colleges? Dumbing down the entrance requirements, curriculum, and the value of a degree in the process? Cancelling debt for some subset of people? Probably not, even if such things are political popular, and will be even more so in the runup to next year’s elections.
The table suggests, and I would argue, the economic value of a HS diploma has fallen since 1999. This suggests, in aggregate, our primary and secondary education efforts aren’t meeting the needs of the rapidly changing domestic and global economies. As many of the world’s emerging economies have shrunk the gap in terms of access to capital and technology, it is imperative the US educational system produce workers who are more productive than these countries are cheap.
Since it appears only slightly more than one-third of US households are ‘headed’ by someone with a bachelor’s degree of higher, it would make sense to tackle this issue at the K-12 level. To treat primary and secondary education as training in order to be competitive in the global economy as an adult. This will require a shift in public resources from the Federal to the state & local levels and a redirection of societal priorities from entertainment to economic…from bread & circuses to dollars & cents. Frankly, it is the right thing do both ethically and economically, and we need to be fanatics about it.
So, in conclusion, as I have run way long today, does the trade deficit matter? In calculating GDP? Not really, as the most-clever among us can prop up the equation with an outsized contribution. However, it does shed light on a societal problem: how our once vast blue-collar middle class is shrinking both in size and economic clout, and just how difficult it is for this group of people to ‘get ahead’ with the economic tools our society has given it.
And that is my missive for LABOR DAY.
Have a great weekend.